NAIC Risk-Based Capital

11making progress . . . together

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NAIC Risk-Based CapitalNAIC Risk-Based Capital

Walter BellWalter Bell

NAIC President and NAIC President and

Alabama Insurance CommissionerAlabama Insurance Commissioner

Vice Chair of IAIS Executive CommitteeVice Chair of IAIS Executive Committee

ASSAL ANNUAL CONFERENCEASSAL ANNUAL CONFERENCE

Santiago, Chile Santiago, Chile


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History of Risk Based History of Risk Based CapitalCapital

Risk based capital concept began in 1989Risk based capital concept began in 1989

September 1990, Examination Oversight September 1990, Examination Oversight

Task Force of NAIC determined Risk Based Task Force of NAIC determined Risk Based

Capital requirements were preferable to Capital requirements were preferable to

minimum capital and surplus minimum capital and surplus

requirementsrequirements

December 1990, NAIC formed two RBC December 1990, NAIC formed two RBC

working groups (one life and one property working groups (one life and one property

and casualty)and casualty)


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History of Risk Based Capital History of Risk Based Capital (Continued)(Continued)

1991 and 1992 Risk-Based Capital 1991 and 1992 Risk-Based Capital

survey distributed to companiessurvey distributed to companies

Life RBC formula finalized in 1993Life RBC formula finalized in 1993

P/C RBC formula finalized in 1994P/C RBC formula finalized in 1994

RBC standards for health RBC standards for health

organizations were implemented in organizations were implemented in

19981998


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The NAIC RBC formula is generally The NAIC RBC formula is generally

a formula-based calculation of a a formula-based calculation of a

minimum level of capitalminimum level of capital

Total Adjusted Capital is compared Total Adjusted Capital is compared

to 4 action levels of RBC where to 4 action levels of RBC where

action is taken by the company or action is taken by the company or

the regulator:the regulator:


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RBC Action Levels:RBC Action Levels: Company Action LevelCompany Action Level

Regulatory Action LevelRegulatory Action Level

Authorized Control LevelAuthorized Control Level

Mandatory Control LevelMandatory Control Level


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The number of companies at The number of companies at

action levels has remained action levels has remained

relatively constant for life and relatively constant for life and

property/casualty (non-life) RBC property/casualty (non-life) RBC

since inception: since inception:


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Life and P/C RBC Life and P/C RBC StatisticsStatistics

20002000 19991999 19981998 19919977

19919966

19919955

CompanyCompany 4444 4141 3737 5555 6060 4444

RegulatorRegulatoryy

2525 1818 1818 1414 2222 2020

AuthorizeAuthorizedd

55 88 99 88 1111 99

MandatorMandatoryy

3030 2727 2828 2727 3434 2525

Total Total ActionAction

104104 9494 9292 104104 127127 9898

Total Co’sTotal Co’s 3,623,6288

3,543,5466

3,783,7811

3,843,8433

3,923,9255

3,933,9333

% of Total% of Total 2.9%2.9% 2.7%2.7% 2.4%2.4% 2.72.7%%

3.23.2%%

2.52.5%%


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Life and P/C RBC Life and P/C RBC StatisticsStatistics

20062006 20052005 20042004 20020033

20020022

20020011

CompanyCompany 2828 3737 4444 4343 6060 3838


1919 1919 2929 1616 3232 3232


77 66 88 1111 1111 66

MandatorMandatoryy

3535 3535 4444 3939 3333 4040


8989 9797 125125 109109 136136 116116

Total Co’sTotal Co’s 3,523,5266

3,503,5011

3,533,5322

3,473,4755

3,593,5944

3,623,6255

% of Total% of Total 2.5%2.5% 2.8%2.8% 3.5%3.5% 3.13.1%%

3.83.8%%

3.23.2%%


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As a result of P/C insolvencies in the As a result of P/C insolvencies in the

early 2000’s, a ‘trend test’ was early 2000’s, a ‘trend test’ was

added to P/C RBC in 2005added to P/C RBC in 2005

The ‘trend test’ may trigger a The ‘trend test’ may trigger a

company action level if a ratio of company action level if a ratio of

the companies claims and expenses the companies claims and expenses

to premiums is unfavorableto premiums is unfavorable


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The number of health companies The number of health companies

at action levels started high and at action levels started high and

has declined subsequently: has declined subsequently:


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Health RBC StatisticsHealth RBC Statistics

20022002 20012001 20002000 19991999 19981998

CompanyCompany 3737 4848 1919 3030 3737


3333 4343 1616 2222 3333


1717 2323 4646 2929 1717

MandatorMandatoryy

2121 2626 4242 3636 2121


108108 140140 123123 117117 108108

Total Co’sTotal Co’s 672672 578578 543543 563563 672672

% of Total% of Total 16.116.1%%

24.224.2%%

22.722.7%%

20.820.8%%

16.116.1%%


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Health RBC StatisticsHealth RBC Statistics

20062006 20052005 20042004 20032003 20022002

CompanyCompany 99 1212 88 2323 3232


77 55 88 2121 2525


66 11 22 44 1212

MandatorMandatoryy

1212 99 77 1010 1414


3434 2727 2525 5858 8383

Total Co’sTotal Co’s 791791 754754 704704 698698 687687

% of Total% of Total 4.3%4.3% 3.6%3.6% 3.5%3.5% 8.3%8.3% 12.112.1%%


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Principles-Based CapitalPrinciples-Based CapitalProperty and Casualty RBCProperty and Casualty RBC

Catastrophe RiskCatastrophe Risk Potentially use modeling of catastrophe Potentially use modeling of catastrophe

risk in the RBC formularisk in the RBC formula Allow companies to use their own RMS, Allow companies to use their own RMS,

Equecat, etc. modelsEquecat, etc. models


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Principles-Based CapitalPrinciples-Based CapitalLife RBCLife RBC

C-3 – Interest Rate Risk and Market C-3 – Interest Rate Risk and Market RiskRisk C-3 Phase I – 2000C-3 Phase I – 2000 C-3 Phase II – 2005C-3 Phase II – 2005 C-3 Phase III – 2008 or 2009C-3 Phase III – 2008 or 2009 C-3 Phase IV C-3 Phase IV Future ?Future ?


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C-3 Phase IC-3 Phase I

Interest rate risk of annuities and single Interest rate risk of annuities and single premium lifepremium life

Based on cash flow testing of assets and Based on cash flow testing of assets and liabilitiesliabilities

Originally, only companies that Originally, only companies that triggered one of two tests for materialitytriggered one of two tests for materiality

May be changed to a CTE methodology May be changed to a CTE methodology for modeling in the future.for modeling in the future.


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C-3 Phase IIC-3 Phase II

Interest rate risk and market risk of Interest rate risk and market risk of annuities with guaranteed benefitsannuities with guaranteed benefits VAGLB (Variable Annuity with Guaranteed VAGLB (Variable Annuity with Guaranteed

Living Benefits) Living Benefits) GMIB (Guaranteed Minimum Income Benefit) GMIB (Guaranteed Minimum Income Benefit) GMDB (Guaranteed Minimum Death Benefit) GMDB (Guaranteed Minimum Death Benefit)

Modeling using a CTE approachModeling using a CTE approach Relatively small number of companiesRelatively small number of companies


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C-3 Phase IIIC-3 Phase III

Interest rate risk and market risk for Interest rate risk and market risk for life productslife products

Modeling using a CTE approachModeling using a CTE approach

Affect a large number of companiesAffect a large number of companies


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C-3 Phase IVC-3 Phase IV

Interest rate risk for all annuitiesInterest rate risk for all annuities

Modeling using a CTE approachModeling using a CTE approach

Replace current C-3 Phase I and Replace current C-3 Phase I and perhaps Phase IIperhaps Phase II


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FutureFuture

Combine C-3 Phases into one ?Combine C-3 Phases into one ?

Asset Risk ?Asset Risk ?

Insurance Risk ?Insurance Risk ?

Comprehensive internal models ?Comprehensive internal models ?


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Future (Continued)Future (Continued)

NAIC Overarching Consideration: NAIC Overarching Consideration:

Capital standards and compliance Capital standards and compliance measurements should be firmly rooted in measurements should be firmly rooted in an auditing, accounting, and actuarial an auditing, accounting, and actuarial context that is cost-justified, practical, context that is cost-justified, practical, and workable.and workable.

Especially, when regarding an adversarial Especially, when regarding an adversarial regulatory action that must proceed based on regulatory action that must proceed based on legal findings.legal findings.


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THANK YOUTHANK YOU

Walter BellWalter Bell

NAIC President and NAIC President and

Alabama Insurance CommissionerAlabama Insurance Commissioner

Vice Chair of IAIS Executive CommitteeVice Chair of IAIS Executive Committee

[email protected]@insurance.alabama.gov

Documents

NAIC Risk-Based Capital